NOV Cut to Underperform - Analyst Blog
February 19 2013 - 1:40PM
Zacks
On Feb 11, 2013, we downgraded oilfield services behemoth
National Oilwell Varco Inc. (NOV) to Underperform
from Neutral, based upon a number of near-term challenges. Our
bearish investment thesis is supported by a Zacks Rank #4
(Sell).
Why the Downgrade?
With markets remaining competitive and pricing likely to be soft,
the company’s margins are expected to suffer in the next few
quarters. The recent weakness in the North American onshore
drilling environment has also been a negative. Furthermore, we
expect shares of National Oilwell Varco to remain depressed until
it fully works its way through the acquisition of Robbins
& Myers Inc. (RBN).
Causes for Concern
With new competitors entering the market and shrinkage of capital
expenditure spending by the drilling contractors, National Oilwell
Varco has seen its new equipment package pricing fall around 10%
below the levels achieved during the peak of 2007–2008.
In particular, the company’s margins have been hit hard by the
ongoing North American drilling slump. We expect the situation –
characterized by tepid demand and weak pricing – to normalize only
sometime in late 2013.
National Oilwell Varco’s proposed $2.5 billion acquisition of
smaller rival Robbins & Myers has been delayed due to the
extension of antitrust reviews by the U.S. and Canadian officials.
This has been a drag on the energy equipment contractor’s share
price.
The company’s widespread international operations expose National
Oilwell Varco to certain risks that include embargoes and/or
expropriation of assets, exchange rate risks, terrorism and
political/civil sentiment, etc.
Stocks that Warrant a Look
While we expect National Oilwell Varco to perform below its peers
and industry levels in the coming months and see little reason for
investors to own the stock, one can look at McDermott
International Inc. (MDR) and Patterson-UTI Energy
Inc. (PTEN) as good buying opportunities. These energy
equipment suppliers – sporting a Zacks Rank #2 (Buy) – have solid
secular growth stories with potential to rise from current
levels.
MCDERMOTT INTL (MDR): Free Stock Analysis Report
NATL OILWELL VR (NOV): Free Stock Analysis Report
PATTERSON-UTI (PTEN): Free Stock Analysis Report
ROBBINS & MYERS (RBN): Free Stock Analysis Report
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